Question

An investor purchases a stock for $60 and a one-year put for $0.90 with a strike price of $50. He also sells a one-year call for $1.05 with a strike price of $70.

What is the total cost of acquiring this position?

What is the maximum payoff for this position?

What is the maximum profit for this position?

What is the minimum payoff for this position?

What is the minimum profit for this position?

Draw the payoff and profit graphs together with payoff table for this position

	S<50	50	70
Stock share
Put@55
Call@65

Answer 1

Here one purchases stock of $60, hence it is cash out flow

One purchases put option, hence one has to pay premium of $0.90, hence it is cash outflow

One sells call option, hence one will receive premium of $1.05, hence it is cash inflow

Thus total cost of position = 60 + 0.9 - 1.05

=59.85$

Table showing payoff

Price as at expiry	Profit/loss on stock held @ 60	Profit on put option bought Strike price = $50	Loss on call option sold Strike price = $70	Net premium received	Total Profit and loss
	A	B	C	D	E = A + B+ C +D
40	-20	10	0	0.15	-10
41	-19	9	0	0.15	-10
42	-18	8	0	0.15	-10
43	-17	7	0	0.15	-10
44	-16	6	0	0.15	-10
45	-15	5	0	0.15	-10
46	-14	4	0	0.15	-10
47	-13	3	0	0.15	-10
48	-12	2	0	0.15	-10
49	-11	1	0	0.15	-10
50	-10	0	0	0.15	-10
51	-9	0	0	0.15	-9
52	-8	0	0	0.15	-8
53	-7	0	0	0.15	-7
54	-6	0	0	0.15	-6
55	-5	0	0	0.15	-5
56	-4	0	0	0.15	-4
57	-3	0	0	0.15	-3
58	-2	0	0	0.15	-2
59	-1	0	0	0.15	-1
60	0	0	0	0.15	0
61	1	0	0	0.15	1
62	2	0	0	0.15	2
63	3	0	0	0.15	3
64	4	0	0	0.15	4
65	5	0	0	0.15	5
66	6	0	0	0.15	6
67	7	0	0	0.15	7
68	8	0	0	0.15	8
69	9	0	0	0.15	9
70	10	0	0	0.15	10
71	11	0	-1	0.15	10
72	12	0	-2	0.15	10
73	13	0	-3	0.15	10
74	14	0	-4	0.15	10
75	15	0	-5	0.15	10
76	16	0	-6	0.15	10
77	17	0	-7	0.15	10
78	18	0	-8	0.15	10
79	19	0	-9	0.15	10
80	20	0	-10	0.15	10

Profit diagram